It is hard to get excited after looking at Imeik Technology DevelopmentLtd's (SZSE:300896) recent performance, when its stock has declined 18% over the past month. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Imeik Technology DevelopmentLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Imeik Technology DevelopmentLtd is:

29% = CN¥1.9b ÷ CN¥6.5b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.29 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Imeik Technology DevelopmentLtd's Earnings Growth And 29% ROE

Firstly, we acknowledge that Imeik Technology DevelopmentLtd has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 5.8% also doesn't go unnoticed by us. So, the substantial 38% net income growth seen by Imeik Technology DevelopmentLtd over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Imeik Technology DevelopmentLtd's growth is quite high when compared to the industry average growth of 5.2% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is 300896 worth today? The intrinsic value infographic in our free research report helps visualize whether 300896 is currently mispriced by the market.

Is Imeik Technology DevelopmentLtd Making Efficient Use Of Its Profits?

Imeik Technology DevelopmentLtd's three-year median payout ratio is a pretty moderate 49%, meaning the company retains 52% of its income. So it seems that Imeik Technology DevelopmentLtd is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Imeik Technology DevelopmentLtd is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 37% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that Imeik Technology DevelopmentLtd's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.